Chapter 2: Understanding Small Business Insurance for Independent Consultants
Part 4: Small Business Insurance Endorsements for Independent Consultants
Though you can purchase a robust business insurance policy, it's important to know that no single policy can cover every event, situation, or circumstance. Each plan has its limits and exclusions.
For instance, we discussed that standard Property Insurance policies don't cover hurricanes, flooding, and earthquakes. So what's a business owner on the coast supposed to do when faced with these coverage gaps?
This answer is to purchase an endorsement (aka a "rider"). An endorsement is an added provision to an insurance policy — a kind of "mini" policy that fills in the coverage gaps in your plan.
Endorsements allow you the flexibility to tailor your insurance plan to your needs and industry-specific risks. That way you won't pay extra for bells and whistles that your business may not require. And because riders are designed to fill a specific need (as opposed to casting a wide coverage net), they are generally pretty inexpensive.
Read on to learn about some riders that you may consider including in your business protection plan.
Extended Reporting Period (ERP) Endorsement / Tail Coverage
Earlier, we examined the inner workings of E and O Insurance and claims-made coverage. As you now know, the "claims-made" caveat means that a continuous policy is a must. (For a refresher, jump to page XX of this guide.)
But what happens if you want to switch providers without exposing your business to liability suits? Extended Reporting Period coverage (aka "tail coverage") can help you avoid coverage gaps between your past policy and your new E&O policy.
Your previous insurance provider issues this policy. If you have this endorsement and you must file an E&O Insurance claim for an event that happened under your previous policy, you'll receive coverage benefits.
Prior Acts Endorsement / Nose Coverage
Prior Acts coverage (aka "nose coverage") is another endorsement that fills potential gaps in your E and O Insurance if you're transitioning between plans. Whereas ERP coverage is issued by your former insurance provider, Prior Acts coverage is purchased from your new insurance provider. This rider covers your business for incidents that haven't been reported, but that happened under your former E&O policy.
Why Starting and Stopping Insurance Coverage Never Pays Off
As an independent contractor or sole proprietor, you probably perform a delicate balancing act with your finances. If you're like most small-business owners, you often have to mix your personal and business finances just to make ends meet. So it's understandable that you don't want to take on any unnecessary expenses.
But as you know, business insurance isn't an unnecessary expense. While you may be tempted to drop an insurance policy after a contract is completed, the risk is hardly worth the few bucks you'll save month to month.
And if money is tight enough to consider this as an option, imagine the devastation a liability suit would cause. You could end up hundreds of thousands of dollars in debt if you're found guilty of wrongdoing. Even hiring an attorney can cost a small fortune.
Errors and Omissions Insurance is especially important to keep in force. Without an active policy or the appropriate endorsements, you may not be able to receive your insurance benefits, even if the alleged incident happens while your old policy is active.
And when you're dealing with client projects, you can never be too sure that the end of your contract means you're in the clear. After all, each state has a different statute of limitations. So depending on where you live, a past client may be able to file a lawsuit against your consulting business months after you complete your work.
To learn more about each state's statues of limitations, check out Nolo.com's chart "Statutes of Limitations in All 50 States ."
Next: Chapter 3: Tips for Finding Small Business Insurance